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The CFTC has taken the first steps toward possibly regulating carbon credits traded on the voluntary Chicago Climate Exchange (CCX). The CFTC’s action is being closely watched because it comes at a time when Congress is still working on the details of a mandatory national cap-and-trade program -- including its choice as to whether the CFTC or FERC should oversee carbon markets.

On August 17, the CFTC published a notice of action, proposing to regulate the Carbon Financial Instrument (CFI) contract traded on the CCX as a Significant Price Discovery Contract (SPDC) under new authority the CFTC received in the 2008 Farm Bill. The CFI contract is a cash contract that requires the physical delivery of CCX CO2 emission allowances, called a CFI, which individually represent the equivalent of 1,000 metric tons of carbon. Members of the CCX voluntarily participate in the program by signing a legally-binding contract to cut carbon emissions either through direct emission reductions or the purchase of offset credits from others.

The CFTC’s proposal to regulate CFIs as SPDCs marks the second use of the CFTC’s new authority to oversee non-jurisdictional futures contracts. The CFTC only finalized its regulations for implementing this new authority in April 2009. According to the CFTC’s notice of action, regulation of the CFI contract as an SPDC is warranted because it had a daily trading volume of 1,235 contracts for the second quarter of 2009 and 2,661 contacts in the first quarter of 2009; the CFI market is uniquely traded on the CCX; and traders look to the CFI as a source of price information. The first SPDC designation – the Henry Hub LD1 Fixed Price contract traded on the IntercontinentalExchange Inc. (ICE) – had an average volume of 449,010 contracts per day traded during in the first quarter of 2009.

If the proposed action is adopted, CFI contracts will be subject to enhanced futures-like requirements, including potential position limits, large trader reporting,, and enhanced self-regulatory oversight by the CCX.

The CFTC requests comments on its proposal by September 4, 2009.

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.

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